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Should I Itemize on My Tax Return, or Take the Standard Deduction?

It's usually fairly clear which one gives you the biggest tax break -- but not always. Some situations make it a bit trickier to figure out.

If you want to save on your taxes, you should take the biggest deductions you can. Most people take the standard deduction, unless itemizing deductions will give them a larger tax break. Before you just follow the math, though, you should be aware that there are a few situations in which it might be worth it not to go with the obvious decision when filing your tax return.

Running the numbers

The first step in figuring out the right answer for you is to look up how much you could take for the standard deduction this year. For 2016 returns, you'll find the appropriate numbers below.

Filing Status

Standard Deduction for 2016 Tax Year

Single

$6,300

Married filing jointly

$12,600

Head of household

$9,300

Married filing separately

$6,300

Data source: IRS.

However, those numbers are just a starting point. If you're 65 or older or you're blind, you can get a higher standard deduction. For most taxpayers, add $1,550 to the number above if one condition applies, or $3,100 if both apply. Married couples who file jointly get a standard deduction boost of $1,250 for each condition that applies to either spouse. So if both spouses are blind and 65 or older, then the increase in the standard deduction would be at its maximum at $5,000.

Image source: Getty Images.

Many people like the standard deduction because it's easy. Itemized deductions require work, and you have to look at some of the following items to see whether the total would get you a bigger tax break:

Interest you pay on a mortgage

Money you give to charity

Payments for state and local taxes

Expenses for medical and dental services, subject to a minimum threshold of between 7.5% to 10% of your adjusted gross income

Losses from casualties or theft, to the extent they're greater than $100

What you pay toward certain miscellaneous expenses, but only by the amount that they exceed 2% of your adjusted gross income

If itemizing gets you a bigger deduction than the standard deduction, then it usually makes sense to itemize. If the standard deduction is larger, then just use it.

Traps for the unwary

There are a couple of instances in which you have to do some extra work to figure out whether you should itemize or take the standard deduction. A provision known as the Pease limitation on itemized deductions can force high-income taxpayers to reduce the amount they're allowed to write off. For instance, for the 2016 tax year, the threshold income levels are $258,250 for singles, $284,050 for heads of household, $309,900 for joint filers, and $154,950 for married filing separately. Above those levels, the Pease provision requires a reduction in itemized deductions equal to 3% of excess income. As a simple example, if a single person had adjusted gross income of $308,250, then the required reduction in itemized deductions would be $1,500, because that's equal to 3% of the $50,000 excess over the threshold.

The maximum reduction in itemized deductions due to the Pease limitation is 80%, and usually, that still makes it advantageous for those with high incomes to itemize. However, the reduction will occasionally be large enough to make the standard deduction more attractive.

The other trap some couples fall into involves separate returns. If you file separately, then both spouses have to make the same decision about standard or itemized deductions. That makes it necessary to work together in order to figure out the best answer for the couple jointly.

Make a smart choice

It might seem easy to figure out whether to choose the standard deduction or to itemize your deductions. Yet with the IRS, nothing's as simple as it looks. Knowing these potential pitfalls can help you avoid a costly tax mistake.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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